My Company

By Marlene Y. Satter

The 401(k) plan is changing. Of course, that’s nothing new. Driven by everyone who has had anything to do with them, plans over the years have morphed from an extra savings-only vehicle into the primary source of retirement funding for many, and along with that transformation have come loads of features designed to make those plans better serve participants.

What is new is the fact that plans are moving toward a more targeted purpose: to be the sole (or almost sole) source of funding for plan participants. They’re more focused, more automated, and accompanied by bells and whistles that provide easier access, a focus on simplicity while offering more options and (one hopes) less risk, all accompanied by lower — or at least clearer — price tags.

A lot of features that are making their way into plans with increasing frequency today are aimed at reformulating things to improve retirement readiness and help participants and sponsors gauge how well they and their providers are doing.

These include immediate eligibility; restrictions on plan loans, so that participants stand a greater chance of actually having funds to retire on instead of borrowing against their futures; broader investment options, including alternative investments and brokerage windows; Roth after-tax options, which are popular with millennials; and stretch matches, which encourage employees to save more to get even more out of their 401(k)s.

Here’s some of what has been transforming employer-backed plans, at the behest of sponsors, advisors and participants.

Automation. One thing that’s stood out over and over is the need to make the process of signing up for a 401(k) easy, or people simply won’t do it. Sponsors can offer plans with all sorts of features, but if it’s not easy for would-be participants to join up and stay engaged, they won’t. So plans are moving more and more toward automatic enrollment and automatic escalation.

Bob Benish, interim president and executive director of the Plan Sponsor Council of America, says that auto enrollment is not only increasing, it “is something that works well for companies that 1) can afford it; 2) combine it with effective education (more about that later) and 3) recognize it’s most effective when coupled with an auto-deferral program.”

“We’re seeing that more plans are using the 3 percent of pay default deferral, but nearly 60 percent are increasing that default deferral over time,” he said. People “get hung up about” the 3 percent, said Benish, because that’s what’s called for in the safe harbor language. However, he said, “If you stick with that, you’ll never have enough for retirement, and some plans are starting to change that. People need to save 10-15 percent of their income to fund retirement.” That’s why more plan sponsors nowadays are not only doing more to encourage their employees to save adequate amounts but are starting with a default savings rate that will rise over time.
An example of the effect auto-enrollment can have on a plan comes from Amy Powers, director of corporate human resources at plan sponsor Chart Industries. “The one thing we’ve learned over time about humans in general,” said Powers, “is that when things are very complex they tend not to do anything. So when auto features came about a few years ago, we [tried them].”

Under its auto features, Chart matched 50 percent of contributions up to 6 percent. And while that “didn’t turn out to be a huge change in their paychecks, since it was a pretax deferral,” Powers said, it had a substantial effect on employee participation, since “they began seeing some wealth accumulate in their retirement accounts. Our biggest success story was that one of our locations went from 20 percent to 86 percent participation. On average, I think we’re at about 85-90 percent at least deferring into the plan.”

Target date 2.0. Target-date funds are showing up with greater frequency and in more permutations. “The big focus from clients and advisors is on ‘target date 2.0,’” according to Scott Buffington, vice president of sales for MassMutual Retirement Services.

There’s also a “huge rush to QDIAs (qualified default investment alternatives). Target dates are a one-stop solution,” he said. “Sponsors are looking at the next version of the QDIA — a multimanager solution rather than having a single one, or creating unique portfolios and solutions for best in class. There’s a need for fiduciaries to understand that target date products are garnering the most assets. That’s led to a big trend of advisors and sponsors looking for more than just a target-date product.

Target-date funds have really surged, according to Benish. While they may not be a plan design feature per se, he said, they’re “certainly an investment trend that has come up from zero, and (we’ve) seen incredible growth as part of the core offering, with 64.5 percent (of plans) offering target-date funds.”

So where does the 2.0 come in? Chart’s Powers said that the firm includes some very customized options in its TDFs. “It’s sort of a risk-based target date fund, not the traditional ‘pick a date,’” said Powers. “We go through a process to determine how risk tolerant or averse [plan participants] are. [There’s a] conservative custom choice model, on up to an aggressive custom choice model. When we benchmark it, the returns on those [options] are equal to or better than their related indexes. It’s a customized investment strategy. … Those things have made it very helpful.”

Education. Education, of course, is huge. With so much confusion among participants about how plans work and how to choose investments, not only education but new, improved tools to get that information are helping them find their way.

“Education is [what they talk about] in every single instance when we converse with employees,” said Chart’s Powers, “even in large meetings.” An app for the iPhone that educated employees about their account information and progress has made a tremendous difference, she said.

“They can see their current balance, contributions, deferral ... and how much they need to retire,” said Powers, “and if what they have now will get them there. It was an amazing experience for folks to actually be able to sit down and see that, ‘Oh, my gosh, I may not be there yet,’ or to find that they’re actually on track for retirement. That was an amazing result for us.”

More help. A leading request from plan sponsors, according to Buffington, is for assistance in giving employees a holistic view of benefits — “assisting employees with prescriptive guidance (so that they) truly understand where retirement benefits fit into the whole package: health care, exchanges, (all the rest of it).”

Sponsors want “assistance to educate a participant on all different benefits. ... Sponsors don’t have the time and resources to provide that guidance for participants, so they’re leaning on the (plan) advisor.”